More Mutual Funds Assume Hedge Strategies

Mutual funds are experimenting with their strategies a bit, borrowing from the hedge fund world, and testing risky investment strategy “130/30,” according to the Wall Street Journal. The strategy is a way to place bets that stock prices will fall, in hope of profiting from those declines. Mutual funds typically shy away from betting on falling prices, although a handful have tried the technique.As hedge funds and other loosely regulated investments attract piles of investors’ money, more mutual funds are switching their game.

In April, ING Funds launched a 130/130 fund, and last month UBS Global Asset Management started its own version. Supporters of the strategy say it can add 2% or more to a portfolio’s returns above the Standard & Poor’s 500-stock index every year, often with less volatility. This happens because selectively betting that some stocks will decline can provide a cushion in a falling market.

However, just as it has been shown to boost returns, it also adds significant risks, since shorting stocks can be an uncertain strategy that can go very wrong if the market makes unexpected moves.

The strategy is a “blending of traditional money management and hedge-fund management,” said Ric Thomas, head of U.S. enhanced equities at State Street, which has about $3 billion under management in the strategy. “We’re moving into their space.”